Property Rates Bill: conceptual issues

Meeting report

PROVINCIAL AND LOCAL GOVERNMENT PORTFOLIO COMMITTEE
4 June 2003
PROPERTY RATES BILL: CONCEPTUAL ISSUES

Chairperson: Mr Y Carrim (ANC)

Documents handed out:
Local Government Property Rates Bill (B19-2003)
Key Concepts and DPLG Response to Questions Posed by Portfolio Committee
Here are 22 Empirical Studies: Examining Effects of Land Taxation in Actual Practice

SUMMARY
The Committee heard arguments for a uniform land-and-improvements base and then for a land-only base. The Department prefers a uniform land-and-improvements base as it believes that a system which does not take into account the improved value of its properties will end up with the residential property owners paying more than commercial property owners.

MINUTES
The Chair noted that the Department would present its understanding of the terms as used by it in the Bill and thereafter respond to some of the questions posed by the members in the previous meeting. He said that it is important to note that the Committee has not yet formulated its position on these issues and as such it would consider any interpretation as it is still in the process of acquiring information. Therefore as the department would be arguing for a uniform base land and improvements while Mr Dunkley would be arguing for a land-only as the base, ODA would assist the Committee in understanding the advantages and disadvantages of both of these systems.

Key Concepts and DPLG Response to Questions Posed by the Committee
Ms J Manche (Deputy Director-General: DPLG) noted that the focus of the presentation is on key concepts as used in the Bill. She would also attempt to respond to some of the questions posed by the members in the previous meeting. She noted that the difference between the market value and the annual value should be appreciated, as the former is established on the notion of willing seller and willing buyer, while the latter relates to rental value of the property. Furthermore it is important to note that the use value of agricultural land would differ from property to property due to its productivity (see document).

Discussion
The Committee agreed that the distinction between the types of rates of the land-and-improvement base, that is, the improved value and the one of the land-only base should be clearly distinguished.

The Chair noted that the ANC supports any system so long as it does not promote prejudice and ignores the inequalities of the past. It is the principle of the ANC that the system put in place should not be used as an instrument to prevent the emergence of new owners of property.

A SALGA representative asked if the department aims at creating this uniform rate on a national level.

The Chair said that it is important to note the difference between a uniform rate and uniform rating system. What the department proposes is a uniform rating system, which should be applicable nationally.

Mr S Mshudulu (ANC) noted that although a transparent and user-friendly system is very important, the Committee should guard against people coming up with the present status quo, which would not assist the department in the process.

Ms Manche acknowledged the African culture of non-mobility described by Mr B Nobunga (ANC) in the previous meeting, and noted the importance of getting rid of the red-lining system associated with banks. Banks had developed a tendency of determining which areas had market value and clearly this should not be permitted.

The Chair said that as the department had presented its case, Mr Dunkley, assisted by ODA, should present his case with regard to land-only as the base.

Mr N McLachlan (ODA) stated that there are many reasons why a municipality could choose land-only as the base for rating, contrary to land-and-improvement as the base. Amongst other advantages of the land-only base is that it is cost efficient, as the cost of its valuation process is very low. Further since property rates is there to pay for the general services of the community, the land-only base is useful in providing better administrative efficiencies, easier updates of property records and data maintenance. Most of all land value-based valuation and rating may be seen as a possible incentive for investment in improvements and maintenance of the property since improvements are excluded from taxation. Although improvement is a matter of private choice, it should be noted that the manner in which one approach one's property contributes largely to the public good. Hence a rate based on land-and-improvement may undoubtedly discourage people from buying properties as investors - due to fear of property value speculations.

The Chair requested Mr Dunkley, when making his presentation, to touch on the issue of taxation, ie how would land-only as the base be linked with other tax systems applicable in the country. He also requested him to comment on its potential to create jobs and whether investors are really concerned about the property rate systems applicable in the country, when they invest their money.

Here are 22 Empirical Studies: Examining the Effects of Land Taxation in Actual Practice
Mr G Dunkley (International Union for Land Value Taxation) in support of land-only as the base, noted that any form of taxation other than that would discourage whatever use the land is put to. After looking at 217 case studies, they came to the conclusion that the down-taxing of buildings will lead to more buildings and the up-taxing of land will lead to the more efficient utilization of land-sites.

The Chair pointed out that Mr Dunkley had failed to respond to the issues that he requested him to address and instead had raised technicalities. Nonetheless he noted that the department, in conjunction with ODA, would look at those technicalities.

Mr W Doman (DA) questioned the reasoning that taxation of improvements would lead to landowners not improving their land, since at any rate they would still be paying their tax dues.

Mr B Solo (ANC) said that as South Africa has a clear system, which is market driven, it is not clear from Mr Dunkley's presentation how a comparison can be determined between the South African system and those mentioned in the case studies.

The Chair noted that any applicable system should be built on the principle of equality, although it should not prevent emerging owners of property. This means that the process behind BEE should be taken into account, while historical disadvantages of our country are not to be ignored.

Mr E Magashule (ANC) noted that it is important when quoting empirical studies or evidence, that the particular conditions of our country should be taken into account.

Mr Mshudulu agreed adding that any research study would be irrelevant unless it directly interprets the South African situation and the transformation process of South Africa.

Ms Manche said that in looking at research studies, it is important to bear in mind that Hong Kong and the USA, unlike South Africa, have lower levels of inequalities and their inequalities are not along racial lines as is the case in South Africa.

Mr McLachlan questioned the validity of the principle raised by Mr Dunkley that land can be valued without one taking into account the improvements made on it and still arrive at the same equation as if such improvements had been taken into account. He asked how could the land-only rating balance the vertical and horizontal equities and how would one explain the basis of rating to the ordinary ratepayer.

Mr Dunkley responded that the free market system would definitely take care of the differences. He said that the principle should be to discourage property speculation.

Ms Z Ibrahim (ODA) asked if Mr Dunkley is arguing that the land should be taxed more in a variable rate system.

Mr Dunkley replied that Adam Smith once stated that people should not be taxed on their labour and capital but rates should be collected from their properties. The argument is that any collection on improvement of the property would discourage investors as there would be a lot of property speculation.

The Chair noted that a reasonable conclusion seems to be that a land-only rating system would increase the cent amount in the rand applicable to the value of the property. Therefore that would definitely be politically unacceptable.

He said that the Committee would further discuss this issue on Tuesday 10 June 2003 after members had discussed this in their political party study groups.

The meeting was adjourned.